VMware Sales Forecast Misses Estimates as Demand Slumps

By Dina Bass -
Jan 29, 2013

VMware Inc. (VMW), the biggest maker of
software that enables computers to run multiple operating
systems, fell the most since 2008 after forecasting sales that
were less than estimates amid cutbacks from corporate customers.

The stock fell as much as 22 percent to $76.33 after the
company said first-quarter revenue will be $1.17 billion to
$1.19 billion, in a statement yesterday. Analysts anticipated
$1.25 billion, the average of projections compiled by Bloomberg.
EMC Corp. (EMC), which owns a majority of VMware, also slumped.

VMware said it’s facing a tougher first half because of a
weak economy and sluggish federal government demand, which had
an impact on bookings, a measure of future sales. An expected
increase in contract renewals won’t occur until later in the
year, the Palo Alto, California-based company said.

“The company’s guidance was clearly disappointing,” Abhey Lamba, an analyst at Mizuho Securities USA Inc. who recommends
buying the shares, said in a note to clients. “In particular,
management’s license growth expectations of 8 percent to 11
percent for the year are materially lower than expectations, as
investors expected revenue growth acceleration in 2013.”

The shares declined 20 percent to $78.32 at 10:55 a.m. New
York time, while EMC, the world’s biggest maker of storage
computers, slumped 6.8 percent to $23.50. Through yesterday,
VMware had gained 6.6 percent in the past 12 months, and EMC had
declined 2.4 percent, both underperforming the 14 percent
increase in the Standard & Poor’s 500 Index.

‘Wayward Child’

EMC also provided a 2013 forecast that fell short. Sales
will be $23.5 billion, the company said today in a filing.
Analysts projected $23.6 billion on average.

The shares are down because of “poor guidance provided by
their wayward child VMware,” Brian Freed, an analyst at
Wunderlich Securities Inc., said via e-mail. He cut his rating
on VMware to hold from buy today.

VMware will cut 900 jobs, exit some lines of business and
consolidate facilities this year, resulting in charges of $90
million to $110 million, according to a filing.

Even with the job cuts, the company is still hiring and
plans to end the year with head count up by about 1,000, Chief
Executive Officer Pat Gelsinger said on a conference call.

Fourth-quarter profit, excluding items such as stock-based
compensation and a tax adjustment, was 81 cents a share,
exceeding the average estimate of 78 cents, according to data
compiled by Bloomberg. Sales rose 22 percent to $1.29 billion,
compared with a $1.28 billion average projection.

Net income climbed 2.7 percent to $205.8 million, or 47
cents a share, from $200.4 million, or 46 cents, a year earlier.

VMware, already the biggest provider of virtualization
software, is signing more agreements with smaller businesses
because many large corporations already have its software, said
Rick Sherlund, an analyst at Nomura Holdings Inc. Competition
from Microsoft Corp. and Oracle Corp. (ORCL) also may have forced
VMware to reduce prices, he said.

“Growth has been slowing,” Sherlund wrote in a research
report. “Microsoft is having some impact on pricing, more so
than any significant shift in market share so far.”